30 ChaPter^1
tion and distribution centers; and saved up his own capital for reinvestment so
he would not have to rely on outside bankers or speculators. Rockefeller also
began an arrangement where railroads transporting his oil would give him
“drawbacks,” a rebate of 25 cents on each dollar of oil they delivered.
He so dominated the oil business that his enterprise would become a
monopoly. By 1866, oil producers in Pennsylvania were producing almost 14
million barrels a year, and that led to a glut of refineries, which meant too
much competition and falling prices. So Rockefeller began to consolidate the
entire industry. He established the Standard Oil Company so he could control
the oil market, which was often volatile with wild swings in prices and pro-
duction. By creating one mega-company, Rockefeller eliminated excess
capacity and controlled pricing, and, in his mind, saved the entire oil industry.
But Rockefeller played by his own rules, too. He and railroad operators got
together and schemed to double rail rates for other oil firms, but Standard still
got its rebates and drawbacks. The other refineries could not afford the
higher fees, so thus began an “oil war.” Some railroads backed down, but
Rockefeller was so big, and controlled the largest refineries, in Cleveland and
New York, that he weathered the storm and grew bigger. He bought out
other oil companies, and, if they did not want to sell, would move his own
company nearby and charge prices so low that they would be run out of busi-
ness, or he would create a “barrel famine” so they could not store petroleum,
and then buy them out very cheaply. By 1879, Standard Oil owned over 90
percent of the refining capacity in the entire country and almost every inch
of pipeline in and out of the oil region.
Rockefeller wanted domination of the industry for himself, and he called
agreements with others, such as cartels, “ropes of sand.” Rockefeller’s busi-
ness model was an example of both horizontal and vertical integration.
Horizontal integration meant that Rockefeller would take control of the other
companies in his field, and create monopolistic arrangements. Vertical integra-
tion meant that he would control all aspects of oil refining from bottom to
top, from the wells that drew the oil out of the ground, to the barrels and rail
lines, to the distribution centers where consumers would buy kerosene or,
later, gasoline. He also developed the most famous, and infamous, trust, The
Standard Oil Trust, where he turned over control and all stock and assets of his
company to a group of trustees who ran every company Rockefeller owned,
thereby avoiding laws and regulations restricting mergers and collusion, all
legally.